Introducing Our Socially Responsible Investing (SRI) Portfolio

Betterment is moving the category forward for socially responsible investors by offering an SRI portfolio that is fully diversified and keeps costs low.

Originally published: July 19, 2017

It makes sense that some investors try to align their investments with the values and social ideals that shape their world view. The way you live, the career you choose, and the people you care about align with your personal values; shouldn’t your investments do the same?

Socially responsible investing (SRI) is an approach to investing that reduces exposure to companies that are deemed to have a negative social impact—e.g., companies that profit from poor labor standards or environmental devastation—while increasing exposure to companies that are deemed to have a positive social impact—e.g., companies that foster inclusive workplaces or commit to environmentally sustainable practices.

Today, we’re proud to introduce Betterment’s first SRI portfolio. Our SRI strategy aims to maintain the diversified, low-fee approach of Betterment’s core portfolio while increasing investments in companies that meet SRI criteria. The Betterment SRI portfolio is available to all Betterment customers with no minimum.

To learn more about how and why we’ve built the Betterment SRI portfolio, read on to the following sections. Our full approach to our SRI portfolio can be found in the technical whitepaper here.

Why Is Betterment Developing an SRI Portfolio?

Betterment is dedicated to offering a personalized experience for its customers. This means providing options that help customers align our advice to their personal values.

We decided to develop an SRI portfolio because, currently, there are three major ways that investors attempt to execute an SRI strategy, and none meets an investor’s full needs:

Some investors buy SRI mutual funds, settling for unreasonably high fees compared to performance and often losing out on important tax and cost optimization opportunities.

Others opt for one of several SRI-specific investment managers whose SRI portfolios may fulfill the investors’ desire for SRI screening but do not always provide proper diversification against risk.

Still others try to pick their own basket of SRI investments—a challenging, time-intensive, and inaccessible approach for most everyday investors.

We set out to do better for SRI investors. You should not have to choose between holding an SRI portfolio and following a low-cost, diversified investment strategy with tax optimization in order to make sure your investments reflect your personal values.

The Betterment SRI portfolio is designed to achieve this balance. It allows socially conscious investors to express that preference in their portfolios without sacrificing the aspects of Betterment’s advice that protect their returns the most: proper diversification, tax optimization, and cost control.

What Is Betterment’s Approach to SRI?

While SRI has been around for decades, especially for institutions like churches and labor unions, the SRI funds available to individual investors have really only emerged in the last 20 to 30 years. And most of these SRI products have been actively-managed mutual funds with high fees. Only recently have lower cost options, like ETFs for SRI, emerged in the market.

As we developed our SRI Portfolio, we analyzed all low-cost SRI funds available, searching for products that could replace components of our core strategy without disrupting the diversification or cost of the overall portfolio.

We found that the only asset class (i.e., portfolio component) that we could confidently replace with an SRI alternative today is the U.S. large-capitalization stock allocation. Other asset classes, such as value, small-cap, and international stocks and bonds are not replaced with an SRI alternative in our portfolio either because an acceptable alternative doesn’t yet exist or because the respective fund’s fees or liquidity make for a prohibitively high cost to you, the customer.

While just one asset class is affected in our SRI portfolio compared to the Betterment portfolio, that change has an outsized impact on the social responsibility of your overall portfolio. For one, many investors are most concerned about the social responsibility of the largest U.S. companies in their portfolios, which often set standards for acceptable corporate behavior that other companies try to emulate. In our SRI portfolio, stocks (but not bonds) of companies like Exxon, Chevron, Philip Morris, Wells Fargo, Walmart, and Pfizer may be excluded because they are deemed not to meet social responsibility criteria. Other companies deemed to have strong social responsibility practices, such as Microsoft, Google, Proctor & Gamble, Merck, CocaCola, Intel, Cisco, Disney, and IBM may make up a larger portion of the SRI portfolio than they do for Betterment’s core portfolio. In addition, a major reason why there are no acceptable SRI alternatives for other asset classes is that the demand for these products has not been sufficient to encourage fund managers to create them. By electing Betterment’s SRI portfolio, you signal to the investing world that there is a demand for high quality SRI investment options and may help to encourage the development of well-diversified, low-cost SRI funds in a wider variety of asset classes.

If you’re interested in a more quantitative understanding of how the Betterment SRI portfolio compares to our core portfolio in terms of social responsibility, you can review the SRI ratings published by MSCI (see below). MSCI’s ratings for the SRI funds used in Betterment’s SRI portfolio are higher than the ratings for the funds used in the Betterment portfolio. For more information on what the numbers mean, click here for our full whitepaper.

MSCI ESG Quality Scores:

US Large Cap Equity Holdings in the Betterment Portfolio vs. ETF tickers in the Betterment SRI Portfolio

Betterment Portfolio – US Large Cap        DSI         KLD

5.039     6.34        8.01

Let’s Make Investing More Socially Responsible

As you review our new SRI portfolio, you might ask yourself, “Is it more important that my portfolio is well-diversified with reasonable costs, or should my money be exclusively invested in SRI funds, regardless of the cost or level of diversification?”

This is an insightful question that gets to the heart of the tradeoffs involved in socially responsible investing today. Currently, most accessible SRI approaches make investors choose between a well diversified, low-cost portfolio and an inadequately diversified and/or higher cost portfolio comprised of SRI funds.

Diversification and controlled costs are investing fundamentals that all investors—SRI or not—deserve. They’re principles that live at the heart of fiduciary advice. The only reason other SRI solutions settle for higher costs and less diversification is because the industry isn’t challenged to offer something better. We at Betterment believe we can create a future that does not ask SRI investors to choose.

Today, our SRI portfolio reflects a 42% improvement to social responsibility scores for our U.S. large-cap holdings when compared to our core portfolio. In the future, we will improve our SRI portfolio even further, iterating and adding new SRI funds that satisfy our cost and diversification requirements as they become available.